Chanos: “We’re not calling for an impending crash of China”

Jim Chanos was on CNBC talking about, amongst other things, China. And while he is bearish on China, the quote that jumped out at me was the one in the title.

He is bearish on China because of an unprecedented credit-induced bubble in Chinese real estate. He quotes 30 billion sq. ft. of construction underway a 5×5 space for every man, woman, and child in China. However, that doesn’t mean the economy is going to collapse.

It does mean that a huge amount of malinvestment is building up in particular sectors and will certainly reduce efficiency and investment returns. You can only deviate from the market-clearing price for so long. Eventually these command and control manipulations will come a cropper. Chanos says that China has needed ever more fixed asset investment to keep the gravy train going.

Areas where there will be contagion in the West are building materials like cement (think Cemex) or copper. Chanos says:

I would be very leery of any companies that are exporting raw materials into China to build up this real estate bubble.

In short: an historic capital spending boom has produced a bubble and serious malinvestment the implications of which, at a minimum, will be very negative for companies leveraged to capital investment once the boom collapses. Chanos is not making any macro predictions.

Interesting quip from Chanos at about 6:15 in the video below:

China has embraced capitalism to keep the socialist elites entrenched while, more lately in the west, we’ve embraced socialism to keep the capitalist elites entrenched.

Chanos also has a few words to say on Obama’s recent proposals (like me, he is against the bank levy but for the prop trading/leverage proposals). The video is below.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

I agree with Ed. In fact, the just-released Q4 2009 GDP data (which is reported on a year over year basis) implies a
giant sequential increase in nominal GDP growth for the second half and, in particular, the fourth
quarter. Part of this reflects a weird practice by the Chinese statisticians of putting upward
revisions to historical data into the fourth quarter of a calendar year. However, not all of the
implied giant increases in Q4 2009 nominal GDP growth (ranging from 40% to 114% depending
on the analyst) can be attributed to such a statistical screw-up. It may be that nominal GDP
growth in China in the second half of last year was more than 20% annually on a sequential
basis. If so, inflation in China may already be higher than is reflected in the government’s
(massaged?) price indices. I More importantly, real economic growth may now be fast enough to
create resource bottlenecks. Consequently, inflation in this quarter and coming quarters may
exceed all expectations. Inflation actually erodes Chinese competitiveness. What if the big surprise is that we get a devaluation of the remnimbi? One aspect of this implies a loss of competitiveness amongst Chinese manufacturers, which might suggest future WEAKNESS in the yuan, not strength, as the West has been pushing for. This might actually explain the Chinese reticence not to revalue.

In a message dated 04/02/2010 Mountain Standard Time, writes:
======

Edward Harrison wrote, in response to barryschaeffer:

I think the Chinese will resist a large currency move, setting us up for some trade tension in 2010. Marshall Auerback also gets these comments and I would be interested to hear his view.

I am also sympathetic to Richard Koo’s balance sheet recession theme. But I do think he needs to talk about resource allocation and toxic bank debt more. These are issues that contributed to the long malaise.

I am also sympathetic to Richard Koo’s balance sheet recession theme. But
I do think he needs to talk about resource allocation and toxic bank debt
more. These are issues that contributed to the long malaise.

I think the toxic bank debt is an effect of insufficient aggregate demand,
rather than a cause.
Koo has many excellent points in this book, but he believes in a
government budget constraint (GBC) – automatically associated deficit spending with
borrowing (even when he is talking about economies with near zero interest
rates and therefore no need to borrow to maintain interest rate targets).
He is a deficit-dove in this regard and via the GBC he thinks the government
is borrowing the funds from the savings and then spending them to keep
money returning back into the income-generation stream.
This is backwards reasoning. The money that the private sector uses to buy
the bonds comes from the government net spending (deficits). The same
deficits provide the funds to ensure that the private saving desires can be
realised. If the deficit did not expand to meet these desires then, as above,
the paradox of thrift, would drive income (and output) down and a crisis
would emerge. For a good explanation see:
_https://bilbo.economicoutlook.net/blog/?p=3225_ (https://bilbo.economicoutlook.net/blog/?p=3225)